Since our last commentary, the Federal Reserve reduced its overnight interest rate by 0.50%. Fed officials had telegraphed a rate cut months in advance, and in the days leading up to the announcement, the market came to expect a half-point cut as opposed to a quarter-point. The reaction from the market in the subsequent weeks has been positive albeit muted. The S&P 500 traded at 5689 in the minutes following the rate cut announcement on 9/18. It traded at 5681 in the morning of October 1st. Market action over the past few weeks aligns with the message that “we don’t think Fed rate cuts are a reason to be positive on US stocks” from our September commentary. Instead, our indicators are positive on the stock market due to the strong corporate earnings picture, broad participation among companies in the market, and a healthy credit outlook.
On the economic front, the September Consumer Price Index increased 2.6% over the prior year, the lowest reading since March of 2021. Furthermore, most of the increase is due to the CPI’s measure of housing inflation, which is notably lagged. Alternative measures of housing/rent costs suggest that housing inflation will decline in coming months. Inflation continues to decelerate towards the Fed’s 2% goal. Meanwhile, the unemployment rate ticked down to 4.2%. Despite the myriad of recession predictions over the past few years, incoming data continues to align with an expanding economy.
November’s upcoming elections are another topic among investors. All signs point to a very tight race, and the outcome may not be known on election night. We do not think it is wise to adjust portfolios based on potential election outcomes. Every cycle there is commentary about which investments one should favor based on which candidate wins. History shows that these claims rarely turn out to be accurate. Successful public companies have navigated a variety of political regimes; a good company today will be a good company tomorrow regardless of the election results.
In the short term, it would be historically normal to see some pre-election volatility. Additionally, market sentiment and positioning, as measured by the CBOE’s put-call ratio, is consistent with readings that have preceded prior selloffs. The longshoremen’s strike and/or Middle East tensions are potential catalysts. However, given the health of the market and historical market behavior following similar events, we expect any market disruption to be short-lived. Any October dip should be viewed as a buying opportunity in the context of an ongoing bull market.
